GM rethinks emerging market strategy, hedges on China partner

By Norihiko Shirouzu

Published January 27, 2013

Reuters

DETROIT – General Motors Co is reconsidering its emerging-market strategy, Chief Executive Dan Akerson said in an interview, in remarks that could dent the international ambitions of its Chinese partner, SAIC Motor Corp <600104.SS>.

Top executives of the global automaker had begun indicating about three years ago that it would use SAIC, which produces affordable no-frills cars in joint ventures with GM, as its preferred partner to expand into emerging markets worldwide.

But in recent months, GM has been looking to also partner with France's PSA Peugeot Citroen, not only in Europe where the U.S. auto maker is trying to fix its troubled Opel unit but also in Russia and Latin America.

"Our first obligation to one another is to fix our European operations, and potential exists - and it's a real potential - for other areas where they operate and we operate too," Akerson said in a recent interview in Detroit.

"It doesn't mean that we cannot have a relationship in another part of the world," he added, noting PSA lacked scale in Latin America and that "we could help one another" there.

Asked if SAIC would be GM's sole partner globally, Akerson said: "I don't have an answer to that question right now. That's a work in progress."

His comments are the clearest sign yet that GM is hedging its bet on SAIC as it builds its strategy for emerging markets, which offer the fastest sales growth and, according to Jakarta-based auto consultant Michael Dunne, account for more than half of the 81 million vehicles purchased worldwide each year.

SAIC, one of China's biggest auto makers, is keen to become a major global brand, using its strength in building vehicles as cheap as $4,500 as a platform to tackle emerging markets in Asia and beyond. It also makes cars for joint venture brands in China with Volkswagen and its own brands such as Roewe.

The GM-SAIC venture began in 2010 to export Chevy Sail compacts designed and made in China to Chile and Peru. It also exports Chinese-made Wuling microvans and in most cases uses GM's dealer networks to sell the vans in Colombia, Ecuador, Peru and Egypt, according to GM, though the volumes are relatively small.

A SAIC spokeswoman declined to comment on Akerson's comments but said, in relation to partnerships generally: "Like in any good marriage, the most important thing for a successful partnership is to communicate everything, including what we can do and what we cannot do, always with respect."

DIVIDING THE WORLD

Akerson's remarks indicate GM is now trying to divide the emerging world between its two partners. SAIC in Asian markets outside China and PSA in Russia and Latin America - though GM and PSA do not yet have specific emerging-market projects.

He said Southeast Asia and India were "a natural for SAIC" and that GM was indeed in talks with SAIC to establish a manufacturing and sales joint venture in Indonesia.

He described the Chinese firm as GM's foremost Asia partner and dismissed the notion that GM and PSA, which also operates in China, could cooperate in the world's biggest auto market.

GM, which first formed a manufacturing and sales joint venture with SAIC in 1997 to gain access to China, began signaling the importance of SAIC as a global partner in late 2009 when it announced the pair was forming a venture to produce and market their Chinese-made Wuling-branded micro vans as Chevy cars in India.

In 2011, Akerson said China was central to GM's global strategy and described its joint ventures with SAIC as among its keys to success, "not just in China but globally".

However, GM's Shanghai-based spokeswoman, Lori Arpin, denied that the partnership with SAIC was ever meant to be exclusive.

"While we highly value our partnership with SAIC, it has never been our intention to partner with them exclusively," she said in an emailed response to questions.

In expanding outside China, there are already signs of change in the GM-SAIC relationship.

In October, SAIC passed up an opportunity to significantly boost capital in the India joint venture, which was marred by sales declines and a delay in key products - a choice that cut SAIC's stake in the venture to 9 percent from 50 percent.

In December, SAIC said it would make and sell cars in Thailand by teaming up with Thai firm CP Group Co Ltd, not GM.

TARGETING INDONESIA

Akerson said SAIC's cold feet in India and move in Thailand did not cause GM any heartache, saying the partnership was excellent, "like a good marriage".

"We are going to see things differently from time to time, but going forward we will be aligned and we will grow together," he said, adding that GM believed in India's long-term potential while SAIC became a little nervous over short-term returns.

GM's India car sales fell 21 percent in the six months to end-September from a year earlier, according to data from the Society of Indian Automobile Manufacturers. Overall industry car sales dipped 0.3 percent in the same period.

On the Thai deal, Akerson said SAIC had "vetted it all out with us beforehand".

GM's international operations chief, Tim Lee, said in a separate interview that exploring partnerships with a variety of carmakers would be important in meeting what he described as the auto industry's "insatiable appetite to find great low-cost products" for emerging markets.

"Just add up the R&D budgets of the top 10 OEMs (auto makers), and it is a staggering number. It is twice as much as what's needed. If there could be more collaboration, it would be an effective way to solve incremental problems," Lee said.

For SAIC and GM, the next emerging-market target is Indonesia, a country of about 240 million people with a young population and burgeoning economy where Japan's Toyota <7203.T> and affiliate Daihatsu <7262.T> control 60 percent of the auto market

"It's not like Toyota has a right to that level of share," Lee said. "I think they're actually vulnerable," he said, referring in part to the untapped segment for super low-cost micro-cars and vans that sell for well under $10,000.

"Our portfolio of products we have sitting there in China is in some ways perfect for what we want to do in Indonesia."